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What is spread betting?

Spread betting is a hugely popular form of betting that involves speculating on the movement of stocks, shares, commodities, currencies and indices. It also has applications in sports betting, and other gambling sectors.

What used to be seen as the preserve of high-flying city slickers, wearing business suits and carrying briefcases around the City of London is now open to everyone. Share dealing used to require a stockbroker, but with spread betting anyone can speculate on the movement of a market - and it is completely tax-free.

The simplicity and ever-increasing availability of spread betting opportunities have drawn many new punters into this form of betting, which offers a quite different experience to traditional sports betting.

The cut and thrust of stocks and shares can be a thrilling environment to be a part of, but it is vital that anyone getting involved in spread betting gains a solid understanding of the systems and processes involved, before parting with any of their hard-earned cash.

What is spread betting?

Spread betting differs from other types of betting in that it involves betting on the movement of a market, rather than the outcome of an event.

So, whereas in traditional sports betting you bet a stake on the outcome of a sporting event at the fixed odds set by a bookmaker, in spread betting you place a wager on a range, or 'spread', of outcomes, and your success is determined by whether you successfully predict whether the eventual outcome ends up above or below that spread.

When practised in financial markets, spread betting involves speculating on the movement of those markets.

If there is a market that you believe is going to rise in value, and you wish to place a wager on that outcome, you can do what is known in spread betting as "going long" on that market. This means you effectively buy a share in that market - although you don't actually own a share in it - and the profit you stand to make goes up in line with any rise in that market's value.

Equally, if you have reason to believe a market is about to fall in value, you can "go short", or "sell", and if your belief turns out to be correct, you stand to make a profit in line with the degree to which that market falls.

Of course, if your predicted movement of the market turns out to be wrong, you stand to make a loss on your bet.

The bet that you make when spread betting on financial markets equates to a certain stake per point of movement in the market. For example, you might place a spread bet of £5 per point of movement in a particular market, and the losses or gains you stand to make will be £5 for each point of movement in that market.

For example, one of the benefits of financial spread betting when compared to traditional trading on stocks and shares is that by placing your bet you don't actually buy any asset.

The spread betting provider creates a market that you then bet on, rather than actually having to invest in a particular share.

Financial spread betting markets

There is a huge range of markets that you can bet on if you decide to get into spread betting.

Indices are very popular amongst spread bettors, with markets such as the FTSE 100, Wall Street, and the Dow 30 being offered by many providers. One of the benefits of spread betting online is that you can bet on many of these markets outside of their normal trading hours, opening up CFDs around the world at any time you want to bet on them.

Shares are an attractive spread betting market, particularly to people with an interest in business. Many spread betting operators offer spreads for major shares such as Apple and Tesco, creating a tangible connection between spread betting and everyday business for many people involved.

Other markets available from financial spread betting operators include: bonds such as UK gilts and euro bunds; commodities such as corn, wheat and coffee; metal markets such as silver, gold, and palladium; and sectors trading across markets like mining, tobacco, pharmaceutical and biotech, and banks.

Sports spread betting

In sport, spread betting is offered by allowing you to bet on whether a team's final points tally in a given match or event is higher or lower than their expected total. For example, you might place a bet on whether the final points tally of a Premier League team in a given season will be higher or lower than it was in the previous season.

Spread betting tips

There are a number of protocols that spread betting firms put in place to ensure you can settle your bet in the event that your trade goes wrong.

A 'margin call' occurs if any losses your bet incurs reach 10 per cent of the value of the bet itself. The margin call involves the spread betting firm demanding more money, before closing out your position at the current price if you cannot pay the required amount.

Margin calls are not the most secure way to ensure safe spread betting, as you can quickly get into difficulty. A better way to manage potential losses is to utilise 'stop losses'.

By implementing stop losses, you specify a level at which your trade will be automatically closed out, effectively placing a limit on the amount that you can possibly lose in any given bet. However, it is important to understand that 'gapping' can occur in spread betting, whereby a market moves very fast and the stop-loss orders of large numbers of people are implemented at once. These orders are processed in the order they arrive, so it is possible that in such circumstances your losses will exceed the amount specified by your stop loss.

Another option that offers more security is to pay a broker for a guaranteed stop. This way, your loss limit is guaranteed, although it costs you a little more money.

The most important spread betting tip is DYOR - do your own research! The more time you can spend investigating the markets you are interested in, and learning from the betting activity that has taken place around that market, the better chance you will have of enjoying a successful spread betting experience.